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Mexico president gambles with left-leaning reform

Posted:
09/10/2013 01:00:00 AM EDT

MEXICO CITY (AP) -- President Enrique Pena Nieto is gambling that a surprise plan to increase social spending and raise taxes on wealthier Mexicans can quiet much of the left-wing opposition to his most ambitious proposal, opening the state-owned oil company to private investment, analysts and politicians said Monday.

Pena Nieto took aback critics and supporters alike Sunday night with a fiscal reform plan that would introduce Mexico’s first national pension and unemployment insurance plans, along with its first capital gains and dividends taxes, its first carbon tax and its first tax on sugary drinks.

The plan would also close a series of tax loopholes and raise the tax rate on the country’s highest earners.

Many of the measures are aimed at what was long thought to be the fiscal reform’s primary goal: increasing one of the lowest tax collection rates in the developed world, analysts said. Others are clearly designed to placate the left as Pena Nieto tries to push through a controversial reform allowing private investment in the underperforming state oil firm, Pemex, before the end of his first year in office, they said.

Notably, the fiscal reform would not impose the sales tax on food and medicine, a step that had been widely expected and was certain to generate outrage from the left. The government said the reform plan, most of which needs only a majority vote in congress, would add more than $18 billion in additional revenues next year, less than many economic analysts had hoped.

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"It’s really a left-wing reform, a center-left-wing reform that goes in a progressive direction," said Carlos Elizondo Meyer-Serra, a political science professor at the Center for Economic Teaching and Research, a Mexico City think tank. "You create less pressure in the street. In that sense it’s a correct strategy."

During his first nine months, Pena Nieto worked with the country’s two main opposition parties to pass reforms of the tightly concentrated telecommunications market and the union-controlled education system.

But his leftist allies in the Democratic Revolution Party, or PRD, aren’t backing his overhaul of the state oil company, Pemex -- the centerpiece of his bid to reverse years of economic stagnation by addressing some of Mexico’s longest-standing structural problems.

And leftist Andres Manuel Lopez Obrador, who lost to Pena Nieto last year, then split with the PRD over its cooperation with the new president, has promised a series of protests to halt the Pemex reform. Polls say most Mexicans agree with him.

Adding to the threat for Pena Nieto are thousands of members of a dissident teachers union who flooded into Mexico City to protest his education reform and have promised to keep up a series of disruptive marches.

Pena Nieto announced the fiscal reform hours after the first of Lopez Obrador’s demonstrations in Mexico City. The announcement stole much of the attention from the protest, which saw a smaller-than-expected turnout.

"I think it was a proposal with a political sense of urgency," said Alfredo Coutino, Latin America director for Moody’s Analytics. "The fact that it didn’t include tax on food and medicine has a lot to do with the unrest that we’ve seen."

That was a boost for Mexico’s biggest food companies, whose stock prices went up Monday, driving a 2.6 percent rise in the index that tracks the major companies listed on the Mexican Stock Exchange.

The new social benefits require constitutional changes that must be approved by a majority of state legislatures and two-thirds of Mexico’s congress. If enacted, they would not be universal: Unemployment insurance would apply only to the roughly 40 percent of workers with formal jobs, and the new pensions would be for those older than 65 earning less than about $70 a month.

PRD head Jesus Zambrano welcomed the fiscal reform, but in a potential sign of trouble for Pena Nieto, he warned that it wouldn’t lure his party into supporting private investment in oil exploration or backing away from demands for greater political transparency, another potential point of tension with the president’s party.

"This reform, these legal reforms, aren’t interchangeable with any other, with political or energy reform," Zambrano said. "Quite simply, this stands by itself."

Business groups and many analysts said the fiscal proposal did little to spread even some of the burden for government spending onto the majority of Mexicans who work outside the formal economic system.

The tax rate on workers earning more than $37,000 a year would increase to 32 percent from 30 percent under the fiscal reform. The proposal would also impose a 10 percent capital gains and dividends tax. It would eliminate a range of income tax deductions and limit overall deductions to 10 percent of income.

"In the end, it’s pure demagoguery," dentist David Guerrero said as he got his shoes shined on Mexico City’s central boulevard Monday afternoon. "The same people as always are going to be the ones contributing -- we businesspeople."

The fiscal reform would cancel a 5 percent sales tax reduction in sales tax along the border, a measure that had been meant to draw U.S. shoppers. And it would impose sales tax for the first time on private school tuitions, home sales, mortgage and rent payments, pet food and hotel rooms for foreign travelers.

The reform also includes a 7 cent per liter levy on sweetened soft drinks. Mexico has one of the world’s highest rates of soda consumption, a habit blamed for much of the country’s extremely high rate of obesity.

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